Nokia: Rays of Hope Amid the Gloom

While the mobile handset giant posted an unexpected $834 million loss in the third quarter, its sales topped expectations

By Andy Reinhardt and Olga Kharif

There's not much to cheer about in third-quarter results from mobile phone giant Nokia that included an unexpected net loss of €559 million ($834 million)—the first since the Finnish company started reporting quarterly results in 1996—and a nearly 20% decline in revenues year-over-year. That's €2.43 billion ($3.62 billion) less on the top line for the quarter. Investors were certainly in no mood to celebrate: By day's end in Helsinki trading, Nokia (NOK) shares were down nearly 11%, to €9.18, and they fell even more in New York.

But Nokia's bleak quarterly report issued Oct. 15 contained some important nuggets of hope. To start with, the company actually did somewhat better than many analysts had predicted. Overall revenues of €9.81 billion were slightly ahead of Wall Street consensus estimates, according to brokerage RBC Capital Markets (RY.TO). And tight cost controls allowed the world's largest mobile handset maker to turn in better-than-expected earnings before interest and taxes (EBIT) of €741 million, vs. consensus of €702 million.

As a result, Nokia's earnings per share, represented via non-IFRS (International Financial Reporting Standards) accounting, came in at €0.17, compared with an expectated €0.13. Operating cash flow was €720 million, or more than $1 billion, in the quarter. The €0.15 per share net loss under IFRS rules owed to restructuring charges, goodwill writedowns, amortization of intangible assets, and other impairments that added up to €1.167 billion.

Better-Than-Expected Handset Sales

The financial balancing act wasn't enough to satisfy some doubters. "Investors want to see more top-line performance and less performance through cutting operating costs," says Tavis McCourt, an analyst with investment bank Morgan Keegan, a unit of Regions Financial (RF).

But beyond the specifics of the quarter, Nokia saw several positive trends in underlying sales performance. Its quarterly volume of 108.5 million handsets topped expectations by nearly 3 million units, and its average selling price of €62 ($92.40) was slightly above analyst estimates of €61.20. Although Nokia's estimated global market share fell slightly to 37.6%, below some estimates, it was at the mid-range of expectations.

More broadly, Nokia predicted that the global handset market as a whole will shrink less this year than analysts had feared, down by 7% instead of earlier forecasts of 10%, and will grow sequentially in the fourth quarter. Coupled with the company's ability to hold the line on prices, this somewhat higher-than-predicted sales volume produced a 5% sequential rise in Nokia's handset revenues from the previous quarter, to €6.9 billion.

In a statement, Nokia Chief Executive Olli-Pekka Kallasvuo offered a modestly upbeat appraisal of the company's prospects. "The demand for mobile devices improved in many markets during Q3," he said, predicting higher handset volumes, flat market share, and improved operating margins for the company's devices and services unit in the fourth quarter.

That's the good news. The bad—very bad—news came primarily from Nokia's wireless infrastructure joint venture with Siemens (SI), called Nokia Siemens Networks (NSN).

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